China Inflation Watch

Contributors to China's Consumer Price Index, 2007-2012. Source: IMF

This Bystander is less sanguine then some about the January inflation number. Much of the jump in the consumer price index (CPI) to 4.5% year-on-year from December’s 4.1%, reversing five months of decline, can be explained by seasonal factors, notably an early Lunar New Year. But there are some points of concern in the core numbers that bear keeping an eye on.

Non-food price inflation was up 1.8% Y-o-Y, higher than expected. We’ll have to wait for February’s numbers to better judge how much the rise in food prices, up 10.5% Y-o-Y, is attributable to the new year and how much to the return of a firming of global agricultural commodity prices. Shrinking acreage and rising demand for food is making China a larger and larger food importer. One month’s figures, especially from an abnormal month like January, don’t deflect us from our view that the trend is a decline in inflation, but we shall keep a weather eye on the rate of that decline to see if it moderates. The chart above, from the IMF, shows both the trend and the importance of food prices to the overall number.

The latest first-quarter growth forecast from an official source is 8.5%, announced today by the State Information Center, a government think tank. That is down from the 8.9% the center estimates for the fourth quarter and 9.2% for full-2011. Yet it is still a sufficiently brisk pace of growth, especially when taken with the January CPI numbers, for economic planners not to have to rush to further monetary easing.

These are uncertain times for the economy, with the IMF advising Beijing to stand ready with a ‘significant fiscal package’ in the event growth in the eurozone suddenly collapsed. Such spending would likely be just as inflationary as the stimulus that followed the 2008 global financial crisis.

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